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NEWS UPDATES Asean Affairs        11 January 2011

Philippine peso to hit 40:$1

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The Bangko Sentral ng Pilipinas (BSP) will make some technical moves to rein in the rise of the peso, which is expected to hit $40:$1 by the year's end, the Bank of America Merrill Lynch (BoAML) said. "We might see the BSP, from time to time, to tighten the liquidity onshore in order to squeeze out speculators," Ashok Bhundia, BoAML foreign exchange strategist, told reporters.

But he said monetary authorities cannot sustain such a policy without hurting domestic borrowers and the economy.

"The problem is corporates who have dollar borrowings have to raise dollar funds at much higher interest rates. So you cannot sustain this kind of technical maneuver, only for a period of time," Bhundia said.

At the end of 2010, the BSP had intervened heavily to ease the peso's appreciation, traders said. Despite the central bank's intervention, the local unit rose at an average of 6 percent.

Bhundia said monetary authorities are unlikely to carry out capital controls in the Philippines, which in turn will bring the peso-dollar exchange rate to average at 40:$1 by the end of the year.

"The major support for the peso is that it is still undervalued by about 15 percent. According to our models there is room for appreciation," he said.

The BSP had said that it is open to instituting capital controls since countries like China, South Korea, Brazil, Thailand and Indonesia have imposed them to protect their economies from surges in portfolio capital inflows.

"I think the concern is not whether there is appreciation but how rapid the appreciation becomes. Most central banks in the region are concerned this could become a one-way bet and the pace of appreciation could accelerate and become disorderly... that they do not want [to happen]," Bhundia said.

In a separate briefing, First Metro Investment Corp. (FMIC) said the peso will range between 43.50 and 44.50 in the coming months.

"We see a bias for appreciation if the BSP does not intervene in the currency market," Roberto Juanchito Dispo, executive vice president, said.

He said a peso-dollar rate of P41 to P45 by end-2011 "is a safe bet."

At the Philippine Dealing System on Monday the peso closed at 44.31, or 16 centavos weaker than the 44.15 finish last Friday.

The peso-dollar pair opened at 44.10 and moved to a high of 44.33 and low of 44.05.

Total trading volume surged to $1.249 billion from $803.63 million on last week.

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